Brand valuation is guff

Brands are merely a class of assets. The other corporate assets of greater significance are leadership, research and proprietary knowledge, and training and motivation of employees. Many assets have to act in unison to produce value. Computation of brand values naively negates the very purpose that brands serve. Brands will defy any attempts aimed at valuing them. That is what makes brands mystical, say G. Ramachandran and R. Vijay Shankar.

Brands are invaluable bridges that connect products with markets. Goods and services are branded to distinguish them from other commodity-like goods and services. There should be a good reason why so much effort goes into the creation of brands and into the branding of products.

Brands generate premium values at both ends of the bridge. First, brands enable markets to attract those products that best serve the needs of customers. Thereby, they create a value premium for the customers of goods and services. Second, brands enable products to reach the markets they are targeted at. Thereby, they create a value premium for the marketers of goods and services. Therefore, brands make both markets and products better off. Without brands, both markets and products would be worse off.

It would be patently daft to reject the view that brands make both markets and products better off. But brand valuation is all guff. It is all puff. It misses the real stuff. The thrust on the computation of brand values naively negates the very purpose that brands serve. Brands transform indistinguishable commodity-like products into distinct and incomparable goods and services. There are no commodity-like, mechanistic methods to accomplish this transcendental transformation. It is tough for one pea not to be like the other peas. Hence, brands transcend the ordinary. They achieve the impossible. And, there are no deterministic ways to transcend the ordinary. Brands can create inestimable value premiums at both ends of the bridge in many unspecified ways. The only prerequisite is that they have to be in the hands of those that believe in the power of brands to accomplish the extraordinary.

The hands that hold a brand will determine how much value will be created. Therefore, a brand's value is inestimable. There are no commodity-like, normative valuation methods. Brands will defy any attempts aimed at valuing them. That is what makes brands mystical. They will trample upon the egos of those that are mechanistically minded.

Puff overlooks stuff

If brand valuation is naïve, reporting brand values is intemperate vanity. The focus on the reporting of brand values is a jarring negation of the inestimable value premiums that brands create. Commodities and marketable securities alone are amenable to mechanistic methods of reporting. But brands are not commodities. They certainly are not marketable securities. Brands do not have tenors and redemption values. They do not acknowledge the existence of dividend yields and yield curves. But they are marketable. The markets for brands are frighteningly thin and illiquid. This would be an embarrassment to those who extend the logic of disclosures learnt in one market to the market for brands.

Brands are like works of art. They are like the wonderful creations of Pablo Picasso and Rembrandt Harmensz van Rijn. These works of art have a market, but the values at which they change hands are not computed mechanistically.

The eyes of beholders set prices. In the case of brands, the hands of the holders set brand values. The unceasing focus on how to report brand values in financial statements overlooks the plain fact that the hands that hold a brand determine how much value will be created in the future. Any hands that hold a brand will have to work towards creating value premiums in the future. They would accomplish little by reporting the brand's past and present values.

Knowing the known

Those that have a penchant for historical reporting flog the fact that implicit transaction values in mergers are often in excess of the sum of the net value of all reported assets. The excess is limply attributed to brands and other intangible assets. Where explicit transaction values in acquisitions exceed the sum of the net value of assets, the excess is aggressively attributed to brands and other intangible assets. The level of aggression rises when companies acquire brands from other companies without buying other assets. The high purchase prices are offered as proof that brands are valuable.

The aggression shatters toughened glass and reinforced steel when corporate raiders explicitly attribute high acquisition prices to the buyout target's brands. But who needs proof that brands are valuable? Brands are indeed valuable.

Who needs proof that brands are assets? Brands are indeed assets. Brands are valuable assets. Brands are valuable stuff. We have no quarrels with this. We go one step further by regarding brands as invaluable assets.

Undeserved flak

The normative focus on brand valuation would not be so jarring if the brand pundits had not directed some flak to accountants, financial analysts and fund managers. Mr David Haigh, Chief Executive, Brand Finance, and Mr M. Unni Krishnan, Country Manager, Brand Finance, are of the view that traditional measures of financial performance do not reveal fully the value of brands (Praxis, Business Line's Journal on Management, May 2005). Mr Haigh and Mr Krishnan bemoan the fact that earnings per share (EPS) and dividend yield look back rather than forward. But the backward-looking measures of financial performance do not suppress the 'felt impact' of brands.

If brands connect products with markets, the accounting numbers cannot hide them. Brands in the hands of able managers push up earnings and the EPS. Ceteris paribus, if brands do not push up earnings and EPS, something is wrong with the brands or the hands.

Nothing will be wrought by blaming accounting or the accountants. Mr Haigh and Mr Krishnan give credit to corporate raiders for giving the impetus to brand valuation. We go one step further. Corporate raiders give impetus to the rediscovery of brand values. Brands do not push up earnings and EPS if something is wrong with the brands or the hands. Corporate raiders set free the right brands from inept and wrong hands. They buy underused brands. They hand them over to creative hands that know how to generate more value. New value is created. This shows up in the accounting numbers. It shows up in the stock markets.

Putting results ahead

Where brands connect markets with products, they create value. Brands produce measurable results regardless of whether they are valued and reported. Our assertion that brands produce measurable results regardless of whether are valued and reported holds in the case of all assets. This explains why the five core components of business in `Putting results ahead of profits' do not include assets (Business Line, April 19).

The components are core markets, core brands, core products, core activities and core resources. It places core markets at the top of the linear hierarchy. It places resources at the bottom. Brands transform ordinary, commodity-like products into extraordinary value generators and cash gushers. That is why marketers invest in brands. That is why they allocate internal resources towards building brands.

Ordinary products become cash gushers when they strike the value veins that run in the markets. It would be irritatingly daft to reject the view that brands make cash gushers of ordinary products. It would be as daft to see brands in isolation. Brands have to strike the market's value veins.

If they do not, brands do not create value. If brands are valuable, the market is the place to find out if they are valuable. When brands strike the market's value veins, they create value. Companies will capture the value so created through appropriate prices and better profits. There are no other means. They would be foolish not to capture the value.

This explains why financial analysts capture the impact of brands and other useful assets by evaluating future free cash flows (FCF). Brands are merely a class of assets. The other corporate assets of greater significance are leadership, research and proprietary knowledge, and the training and motivation of employees. Many assets have to act in unison to produce value. It is apt that financial analysts view the present value of the FCF as the bundled value of the going concern.

(G. Ramachandran is a financial analyst. R. Vijay Shankar is Director of SSN School of Management and Computer Applications. Feedback may be sent to indiagrow@yahoo.com, shanksvijay@gmail.com and pari@thehindu.co.in)